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Fitch Ratings downgrades Puerto Rico's debt

By DANICA COTO Associated Press

Updated:
02/11/2014 04:57:20 PM EST

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FILE - In this Saturday, Feb. 1, 2014, file photo, Surfers carry their boards over rocks to get to their surfing spot called La Boca, or The Mouth, in Barceloneta, Puerto Rico. The last of three major credit rating agencies downgraded Puerto Rico's debt by two notches to junk status on Tuesday, Feb. 11, 2014.

SAN JUAN, Puerto Rico—The last of three major credit rating agencies downgraded Puerto Rico's debt by two notches to junk status Tuesday.

Fitch Ratings praised the U.S. territory for responding quickly to economic challenges but noted the economy remains weak and its access to the bond market is impaired.

Puerto Rico's government says it plans to issue general obligation bonds soon, although it is unclear how much debt will put on sale or on what date.

David Chafey, chairman of Puerto Rico's Government Development Bank, said Tuesday only that the bonds would be issued in the "near term." He said Barclays, Morgan Stanley and RBC Capital Markets will be the underwriters for the bond sale.

Fitch said that Puerto Rico's bonded debt levels and unfunded pension liabilities are very high compared to U.S. states and that recent downgrades have led to a potential $1 billion in new liquidity demands.

"Puerto Rico's current management has repeatedly shown its ability and willingness to take quick action to address financial challenges and external market concerns," Fitch said. "However, underlying the need for these measures is the very difficult economic, financial and market situation that management continues to confront."

Puerto Rico has assured investors that it will not default on $70 billion in public debt.

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Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and its debt is held by roughly 70 percent of U.S. municipal mutual funds, according to Morningstar.

David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, said Puerto Rico will now have to tap into a different set of lenders in the next few years, including hedge funds and banks.

"It is no longer your average municipal bond holder," he said in a phone interview. "It's going to be much more strategic, much more active type of investors."

Fitch announced its downgrade one day after Gov. Alejandro Garcia Padilla unveiled several measures to help boost Puerto Rico's economy as the island of 3.7 million people battles its eighth year in recession and a 15.4 percent unemployment rate, higher than any U.S. state.

Treasury Secretary Melba Acosta said she was disappointed by Fitch's decision, while Garcia's administration announced it was pushing back by almost one week a webcast to update investors on Puerto Rico's fiscal and economic plans.

Garcia has previously taken steps to strengthen the government's balance sheet, including increasing taxes and authorizing changes to struggling public pension systems.

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